When deciding whether to buy a stock, many investors stare blankly at the share price when they really need to focus on its value.
The world's most famous investor, US billionaire Warren Buffett, summed up the difference between the two in one of his famous quotes. "Price is what you pay, value is what you get."
It is vital that you get good value when buying a stock rather than paying too much for too little, but how exactly do you work this out?
There are a number of methods, some of which involve complex formulas, but you don't have to calculate them yourself, most are shown on sites such as Bloomberg, Yahoo! Finance, Digital Look, MSN Money and others.
Here are four worth knowing.
Price/earnings ratio (P/E)
The P/E ratio is the best-known valuation method. It is calculated by dividing a company's share price by its earnings per share, which shows how much investors need to pay for each dollar, pound, euro or dirham of revenues the business generates.
A result of around 15 times earnings is usually seen as fair value, with anything above that expensive, and anything below cheap.
You have to use this figure carefully, though. Sometimes fast-growing companies can trade at 20 or 30 times earnings, because investors are willing to pay a premium price for strong-growth prospects. US domain name licensing specialist GoDaddy currently trades at 150 times earnings, reflecting strong investor demand.
Others may look temptingly cheap, trading at less than 10 times earnings, but this may flag up problems, for example, a recent profit warning. Apple currently trades at 12.68 times earnings, which suggests it is reasonably good value, but investors are wary about its prospects.
Gordon Robertson, director of financial advisory group InvestMe Financial Services in Dubai, says the P/E ratio gives you a snapshot of where a company stands today, rather than where it is heading. “Many prefer the forward P/E ratio, which is calculated using projected earnings growth and gives a better guide to the future.”
Russ Mould, investment director at online trading platform AJ Bell, says another way of calculating a company’s P/E is to divide its total market capitalisation by net income. “This reveals what the P/E really measures – the number of years it will take the company to earn its market value, assuming annual profits stay the same.”
He warns against buying companies with sky-high P/Es, such as technology or biotechnology stocks. “Given the rapid rate of change in these industries it is risky to pay up to 30 or 40 times earnings.”
Right now, many believe the US stock market is overvalued because the S&P 500 index trades at 28.7 times earnings, although it has fallen since its recent peak of 33 times. In contrast, the FTSE 100 trades at around 11.5 times earnings, with UK stocks trading low due to Brexit fears.
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Price/earnings to growth ratio (PEG)
The PEG takes the P/E ratio and divides it by the growth rate of the company's earnings over a specific time period, in a bid to give a broader picture of its likely progress. A PEG of less than 1 is considered as undervalued. Bloomberg calculates Apple at 1.13, a fraction over fair value. The higher the PEG, the worse the value.
Mr Mould says online global retail e-commerce firm Amazon has an incredibly expensive P/E ratio of 61.6 times earnings but analysts expect its earnings to rise 35 per cent in 2019. “If you divide 61.6 by 35 you get a PEG ratio of 1.77. That is high but Amazon bulls will say its dominant market position and fast-rising revenues justify that valuation.”
The danger is that if Amazon's earnings grow less than 35 per cent, disappointed investors will sell and its stock could fall.
Arun John, lead researcher at Century Financial Brokers in Dubai, also favours the PEG over P/E. “What investors really want to see is strong future earnings growth making the PEG a very relevant ratio.”
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Return on capital employed (ROCE)
Mr Mould says ROCE is valuable because it measures how well management is allocating the money that you – the investor – are giving them.
ROCE is calculated by dividing net operating profits by the amount of capital used to generate them. “In simple terms, the higher ROCE the better. It shows management is allocating its capital effectively, and operating margins are strong.”
Ideally, you should calculate the ROCE over a five to 10-year span. "The more consistent, the better. Otherwise the danger is that you buy into the stock at the peak of its fortunes.”
Mr Mould shows how the ROCE can help investors judge a stock such as silicon chipmaker Intel, which needs to generate big profit margins to fund research and development, and state-of-the-art production equipment.
Its 2017 annual report shows operating profits of $17.4 billion and $95.8bn of capital employed. "This gives a ROCE of 18 per cent, well ahead of the cost of borrowing and equity, suggesting the company is still creating value for shareholders.
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Price-to-sales ratio (P/S)
Mr John is a fan of the P/S ratio, which is calculated by taking the total market cap of a company and dividing it by annual sales. "It is a great valuation metric, simple and effective," he says.
The P/S ratio is also reliable because while companies can manipulate annual profit figures, say, by deferring expenditure, it is much harder to manipulate revenues.
It is typically based on sales from the four previous quarters and the lower the ratio the better, as you are paying less for each sale. Scores of below one are prized. UK insurer Legal & General Group is currently trading at a P/S ratio of 0.40.
The best thing about the P/S ratio is the lack of volatility, when compared to other numbers like earnings or operating profits, Mr John says. “For example, Google parent Alphabet suffered a $5bn hit last year due to a European Commission fine. This one-off charge affected profits, but not the P/S ratio.”
It also helps investors compare companies in the same sector but at different stages of growth, for example pitting $302bn payment processing giant Visa against $27bn upstart Square, Mr John says. “In this case, the P/S ratio makes more sense than an earnings multiple since Square makes only marginal profits due to the huge investments required in its early growth phase.”
Bloomberg shows Visa has a P/S ratio of 13.65, while Square is lower at 8.86. Both are expensive but also performing well, with Visa up 14.83 per cent in the last year, and Square up a massive 67.7 per cent. Square may be better value, but it cannot keep growing at this rate year after year.
There are other valuation methods, such as the price-to-book (P/B) ratio, which divides the share price by its book value, or carrying value of its balance sheet, with numbers below 1 considered good value.
Never buy a stock based purely on valuation metrics. A stock may look good value but that may highlight underlying problems. It probably won’t be a good buy if it has just issued its fourth successive profit warning, the chief executive has just quit or it is launching an urgent rights issue.
How to keep control of your emotions
If your investment decisions are being dictated by emotions such as fear, greed, hope, frustration and boredom, it is time for a rethink, Chris Beauchamp, chief market analyst at online trading platform IG, says.
Greed
Greedy investors trade beyond their means, open more positions than usual or hold on to positions too long to chase an even greater gain. “All too often, they incur a heavy loss and may even wipe out the profit already made.
Tip: Ignore the short-term hype, noise and froth and invest for the long-term plan, based on sound fundamentals.
Fear
The risk of making a loss can cloud decision-making. “This can cause you to close out a position too early, or miss out on a profit by being too afraid to open a trade,” he says.
Tip: Start with a plan, and stick to it. For added security, consider placing stops to reduce any losses and limits to lock in profits.
Hope
While all traders need hope to start trading, excessive optimism can backfire. Too many traders hold on to a losing trade because they believe that it will reverse its trend and become profitable.
Tip: Set realistic goals. Be happy with what you have earned, rather than frustrated by what you could have earned.
Frustration
Traders can get annoyed when the markets have behaved in unexpected ways and generates losses or fails to deliver anticipated gains.
Tip: Accept in advance that asset price movements are completely unpredictable and you will suffer losses at some point. These can be managed, say, by attaching stops and limits to your trades.
Boredom
Too many investors buy and sell because they want something to do. They are trading as entertainment, rather than in the hope of making money. As well as making bad decisions, the extra dealing charges eat into returns.
Tip: Open an online demo account and get your thrills without risking real money.
The five pillars of Islam
Our legal consultants
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
Profile
Company: Justmop.com
Date started: December 2015
Founders: Kerem Kuyucu and Cagatay Ozcan
Sector: Technology and home services
Based: Jumeirah Lake Towers, Dubai
Size: 55 employees and 100,000 cleaning requests a month
Funding: The company’s investors include Collective Spark, Faith Capital Holding, Oak Capital, VentureFriends, and 500 Startups.
Killing of Qassem Suleimani
The biog
Hobbies: Salsa dancing “It's in my blood” and listening to music in different languages
Favourite place to travel to: “Thailand, as it's gorgeous, food is delicious, their massages are to die for!”
Favourite food: “I'm a vegetarian, so I can't get enough of salad.”
Favourite film: “I love watching documentaries, and am fascinated by nature, animals, human anatomy. I love watching to learn!”
Best spot in the UAE: “I fell in love with Fujairah and anywhere outside the big cities, where I can get some peace and get a break from the busy lifestyle”
Nepotism is the name of the game
Salman Khan’s father, Salim Khan, is one of Bollywood’s most legendary screenwriters. Through his partnership with co-writer Javed Akhtar, Salim is credited with having paved the path for the Indian film industry’s blockbuster format in the 1970s. Something his son now rules the roost of. More importantly, the Salim-Javed duo also created the persona of the “angry young man” for Bollywood megastar Amitabh Bachchan in the 1970s, reflecting the angst of the average Indian. In choosing to be the ordinary man’s “hero” as opposed to a thespian in new Bollywood, Salman Khan remains tightly linked to his father’s oeuvre. Thanks dad.
Dates for the diary
To mark Bodytree’s 10th anniversary, the coming season will be filled with celebratory activities:
- September 21 Anyone interested in becoming a certified yoga instructor can sign up for a 250-hour course in Yoga Teacher Training with Jacquelene Sadek. It begins on September 21 and will take place over the course of six weekends.
- October 18 to 21 International yoga instructor, Yogi Nora, will be visiting Bodytree and offering classes.
- October 26 to November 4 International pilates instructor Courtney Miller will be on hand at the studio, offering classes.
- November 9 Bodytree is hosting a party to celebrate turning 10, and everyone is invited. Expect a day full of free classes on the grounds of the studio.
- December 11 Yogeswari, an advanced certified Jivamukti teacher, will be visiting the studio.
- February 2, 2018 Bodytree will host its 4th annual yoga market.
Sole survivors
- Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
- George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
- Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
- Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.
The specs: 2018 Ducati SuperSport S
Price, base / as tested: Dh74,900 / Dh85,900
Engine: 937cc
Transmission: Six-speed gearbox
Power: 110hp @ 9,000rpm
Torque: 93Nm @ 6,500rpm
Fuel economy, combined: 5.9L / 100km
FFP EXPLAINED
What is Financial Fair Play?
Introduced in 2011 by Uefa, European football’s governing body, it demands that clubs live within their means. Chiefly, spend within their income and not make substantial losses.
What the rules dictate?
The second phase of its implementation limits losses to €30 million (Dh136m) over three seasons. Extra expenditure is permitted for investment in sustainable areas (youth academies, stadium development, etc). Money provided by owners is not viewed as income. Revenue from “related parties” to those owners is assessed by Uefa's “financial control body” to be sure it is a fair value, or in line with market prices.
What are the penalties?
There are a number of punishments, including fines, a loss of prize money or having to reduce squad size for European competition – as happened to PSG in 2014. There is even the threat of a competition ban, which could in theory lead to PSG’s suspension from the Uefa Champions League.
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Getting there
Flydubai flies direct from Dubai to Tbilisi from Dh1,025 return including taxes
JERSEY INFO
Red Jersey
General Classification: worn daily, starting from Stage 2, by the leader of the General Classification by time.
Green Jersey
Points Classification: worn daily, starting from Stage 2, by the fastest sprinter, who has obtained the best positions in each stage and intermediate sprints.
White Jersey
Young Rider Classification: worn daily, starting from Stage 2, by the best young rider born after January 1, 1995 in the overall classification by time (U25).
Black Jersey
Intermediate Sprint Classification: worn daily, starting from Stage 2, by the rider who has gained the most Intermediate Sprint Points.
Conflict, drought, famine
Estimates of the number of deaths caused by the famine range from 400,000 to 1 million, according to a document prepared for the UK House of Lords in 2024.
It has been claimed that the policies of the Ethiopian government, which took control after deposing Emperor Haile Selassie in a military-led revolution in 1974, contributed to the scale of the famine.
Dr Miriam Bradley, senior lecturer in humanitarian studies at the University of Manchester, has argued that, by the early 1980s, “several government policies combined to cause, rather than prevent, a famine which lasted from 1983 to 1985. Mengistu’s government imposed Stalinist-model agricultural policies involving forced collectivisation and villagisation [relocation of communities into planned villages].
The West became aware of the catastrophe through a series of BBC News reports by journalist Michael Buerk in October 1984 describing a “biblical famine” and containing graphic images of thousands of people, including children, facing starvation.
Band Aid
Bob Geldof, singer with the Irish rock group The Boomtown Rats, formed Band Aid in response to the horrific images shown in the news broadcasts.
With Midge Ure of the band Ultravox, he wrote the hit charity single Do They Know it’s Christmas in December 1984, featuring a string of high-profile musicians.
Following the single’s success, the idea to stage a rock concert evolved.
Live Aid was a series of simultaneous concerts that took place at Wembley Stadium in London, John F Kennedy Stadium in Philadelphia, the US, and at various other venues across the world.
The combined event was broadcast to an estimated worldwide audience of 1.5 billion.
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Engine: naturally aspirated 6.5-liter V12
Power: 819hp
Torque: 678Nm at 7,250rpm
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Engine: 5.7-litre V8
Transmission: eight-speed automatic
Power: 362hp
Torque: 530Nm
Price: Dh329,000 (base model 4.0L EXR Dh215,900)
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About Okadoc
Date started: Okadoc, 2018
Founder/CEO: Fodhil Benturquia
Based: Dubai, UAE
Sector: Healthcare
Size: (employees/revenue) 40 staff; undisclosed revenues recording “double-digit” monthly growth
Funding stage: Series B fundraising round to conclude in February
Investors: Undisclosed
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How they line up for Sunday's Australian Grand Prix
1 Lewis Hamilton, Mercedes
2 Kimi Raikkonen, Ferrari
3 Sebastian Vettel, Ferrari
4 Max Verstappen, Red Bull
5 Kevin Magnussen, Haas
6 Romain Grosjean, Haas
7 Nico Hulkenberg, Renault
*8 Daniel Ricciardo, Red Bull
9 Carlos Sainz, Renault
10 Valtteri Bottas, Mercedes
11 Fernando Alonso, McLaren
12 Stoffel Vandoorne, McLaren
13 Sergio Perez, Force India
14 Lance Stroll, Williams
15 Esteban Ocon, Force India
16 Brendon Hartley, Toro Rosso
17 Marcus Ericsson, Sauber
18 Charles Leclerc, Sauber
19 Sergey Sirotkin, Williams
20 Pierre Gasly, Toro Rosso
* Daniel Ricciardo qualified fifth but had a three-place grid penalty for speeding in red flag conditions during practice
Dhadak 2
Director: Shazia Iqbal
Starring: Siddhant Chaturvedi, Triptii Dimri
Rating: 1/5
The specs
Engine: 4.0-litre flat-six
Torque: 450Nm at 6,100rpm
Transmission: 7-speed PDK auto or 6-speed manual
Fuel economy, combined: 13.8L/100km
On sale: Available to order now
PRO BASH
Thursday’s fixtures
6pm: Hyderabad Nawabs v Pakhtoon Warriors
10pm: Lahore Sikandars v Pakhtoon Blasters
Teams
Chennai Knights, Lahore Sikandars, Pakhtoon Blasters, Abu Dhabi Stars, Abu Dhabi Dragons, Pakhtoon Warriors and Hyderabad Nawabs.
Squad rules
All teams consist of 15-player squads that include those contracted in the diamond (3), platinum (2) and gold (2) categories, plus eight free to sign team members.
Tournament rules
The matches are of 25 over-a-side with an 8-over power play in which only two fielders allowed outside the 30-yard circle. Teams play in a single round robin league followed by the semi-finals and final. The league toppers will feature in the semi-final eliminator.
The full list of 2020 Brit Award nominees (winners in bold):
British group
Coldplay
Foals
Bring me the Horizon
D-Block Europe
Bastille
British Female
Mabel
Freya Ridings
FKA Twigs
Charli xcx
Mahalia
British male
Harry Styles
Lewis Capaldi
Dave
Michael Kiwanuka
Stormzy
Best new artist
Aitch
Lewis Capaldi
Dave
Mabel
Sam Fender
Best song
Ed Sheeran and Justin Bieber - I Don’t Care
Mabel - Don’t Call Me Up
Calvin Harrison and Rag’n’Bone Man - Giant
Dave - Location
Mark Ronson feat. Miley Cyrus - Nothing Breaks Like A Heart
AJ Tracey - Ladbroke Grove
Lewis Capaldi - Someone you Loved
Tom Walker - Just You and I
Sam Smith and Normani - Dancing with a Stranger
Stormzy - Vossi Bop
International female
Ariana Grande
Billie Eilish
Camila Cabello
Lana Del Rey
Lizzo
International male
Bruce Springsteen
Burna Boy
Tyler, The Creator
Dermot Kennedy
Post Malone
Best album
Stormzy - Heavy is the Head
Michael Kiwanuka - Kiwanuka
Lewis Capaldi - Divinely Uninspired to a Hellish Extent
Dave - Psychodrama
Harry Styles - Fine Line
Rising star
Celeste
Joy Crookes
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